By Benjamin Chiou
Date: Thursday 13 Sep 2012
The US Federal Reserve has announced that it will launch its third round of quantitative easing, or QE3, by purchasing mortgage-backed securities ‘to support a stronger economic recovery’.
Since the last Federal Open Market Committee (FOMC) meeting in August, the central bank said that economic activity has continued to expand at a “moderate pace”, but employment growth has been slow and the jobless rate remains high. Meanwhile, inflation remains subdued.
In conclusion to its two-day FOMC meeting on Thursday, policy-makers said they were concerned that, without further easing, “economic growth might not be strong enough to generate sustained improvement in labour market conditions”. They also said that strains in global financial markets “continue to pose significant downside risks to the economic outlook”.
The FOMC said that inflation over the medium term likely would run at or below its 2% objective.
As such, the Fed announced that, in order to bolster the economy and make sure than inflation stayed close to its target, it would step up “policy accommodation” by buying more mortgage-backed securities at a pace of $40bn per month.
“The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
“These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
The Committee also decided to keep the target range for the federal funds rate at 0-0.25% and reiterated that exceptionally low levels of the federal funds rate will be adequate at least through to mid-2015.
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